Callum McCarthy, chairman of the Financial Services Authority (FSA), told a conference that fraudsters had been able to infiltrate financial services firms and get into a position where they could commit crime from within.

"There is increasing evidence that organised criminal groups are placing their own people in financial services firms," said Mr McCarthy.

"They can increase their knowledge of firms' systems and controls and thus learn how to circumvent them to commit their frauds.

"There are links that need to be made here too between the work we do, the work firms do and the work of law enforcement."

He said he would call on the government to address difficulties data protection rules caused companies seeking to check staff suspected of committing fraud.

Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn is laundered by British institutions.

Mr McCarthy said there was a link between these crimes and terrorism - claiming the banking industry could play a vital role in countering the threat from extremists.

And he said action against those practices formed a key component of the battle against drugs, people trafficking and terrorist financing.

"It's about fighting the harm on our streets that affects all members of society - including the financial services sector," he said.

"In my speech at the Mansion House in September, I spoke of the challenge we all face from the threat of terrorist activity, a threat brought home to us so vividly by the dreadful events of July 7 and 21.

"I spoke then of the importance of learning the lessons of those events and stressed the implications for business continuity.

"But there is also the contribution that can be made to making terrorist activity more difficult by impeding or preventing the flow of illicit funds."

A spokeswoman for the FSA said evidence of the problem had come from discussions with financial services firms and law enforcement agencies and, she said, intelligence suggested it was ongoing.

She added: "Companies need to look at their vetting and recruitment procedures and have measures in place so that they can spot when fraudulent activity is taking place."

High-street bank HSBC said it had already stepped up its procedures to prevent crime. A spokeswoman said: "When we're taking on a new member of staff there are rigorous checks into the previous employers and their work record and checks are made with the criminal records bureau."

The bank is currently running an awareness campaign to encourage its managers to look out for any fraudulent behaviour, and holds regular briefings to update them on the latest scams.

"If we do catch a member of staff involved in criminal activity we throw the book at them," she added.